The Damaging Psychology of Down Rounds

Both Sides of the Table

“Whenever I hear advice about pricing a round too high for the next round, I can’t help but think: well, if the choice (ceteris paribus) is between. a) doing what is effectively a down round preemptively when I don’t have to, by underpricing my current round in this market vs. b) accepting the market price along with some risk of taking a down round in the future, if I don’t hit my milestones, why would I ever choose b)?”

Founders – Use Your Down Round To Clean Up Your Cap Table

Feld Thoughts

And, rather than rational and helpful thoughts for entrepreneurs, it often brings out the schadenfreude in even the most talented people. We entrepreneurs have been spinning that line for decades in every boom cycle. This is a little tricky in early rounds and with modest up-round financings, as you’ll often have a liquidation preference that is high relative to your overall valuation. Then, if you end up doing a down round, it suddenly matters a lot.

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Cash is King: 8 tips for Optimizing your Startup Financing Strategy

For Entrepreneurs

Note: The concepts in this post will likely be obvious to experienced CEOs and entrepreneurs. Despite that, our experience indicates that entrepreneurs frequently make costly, avoidable mistakes [.]. Getting Funded avoid down round Startup fundraising startup valuationIntroduction This post aims to help startup CEOs optimize their funding strategy by examining how investors value startups, and explaining how to avoid the common cash management pitfalls.

CES Quote of the Day - "We Will Be Very Supportive Of Your Down Rounds This Year".

Seeing Both Sides

Although attendence was down, it is still an insanely large audience of 130,000 attendees and 2,700 companies. CEA head Gary Shapiro reported in his keynote that industy sales were up over 5% and that 2009 will be flat or slightly down. But one look at all the frozen cranes up and down the strip is all you need to know that Sin City is in for a tough run in 2009 and 2010. But Intel Capital will be happy to invest in their down rounds

Startup Funding – A Comprehensive Guide for Entrepreneurs

ReadWriteStart

I have often been asked about Startup Funding by entrepreneurs. Here is Startup Funding, a Comprehensive Guide for Entrepreneurs. Often entrepreneurs pitch from the viewpoint of market shares. You might have seen that valuations of several unicorns were suddenly slashed down.

Quote Of The Day

Altgate

@altgate Startups, Venture Capital & Everything In Between Skip to content Home Furqan Nazeeri (fn@altgate.com) ← Be Glad You Are An Entrepreneur! Why I Canceled My CO2stats Account → Quote Of The Day Posted on January 9, 2009 by fnazeeri We intend to continue forward and be very supportive of your down rounds this year.&# ← Be Glad You Are An Entrepreneur!

How NZ entrepreneurs can up their capital raising game

NZ Entrepreneur

In the first of a three part series on early stage business investment, we asked serial entrepreneur and investor Josh Comrie what three key things New Zealand entrepreneurs must get better at when it comes to seeking angel investment. I personally funded my first ventures, then led the two rounds that have seen Ambit take in $2.2m So here are three critical areas that could significantly multiply outcomes for NZ entrepreneurs, if mastered.

Professional Investors Qualms About Crowdfunding

Startup Professionals Musings

With the advent and growth of crowdfunding over the past few years, many entrepreneurs have predicted the demise of those demanding angel investment groups and venture capital organizations. That’s not as high as the failure rate with professional investors, but it should convince entrepreneurs that crowdfunding has been no panacea for funding. These groups are now largely run by volunteers at no cost to entrepreneurs.

The Resetting of the Startup Industry

Both Sides of the Table

If you raised money in the past 2 years and have grown it is possible that your next round valuation might be flat (or lower) even though you have a higher revenue because investors may value your multiple differently. We entrepreneurs have been spinning that line for decades in every boom cycle. If you can get a round done at the price you expect – well done. Don’t assume that you can “just do a down round” if necessary.

What Most People Don’t Understand About How Startup Companies are Valued

Both Sides of the Table

And two big changes have happened that are widely known – in the past quarter the value of some very high profile companies such as LinkedIn and Twitter have fallen substantially plus Fidelity (usually a public market investor) has written down the value of many of it’s later-stage private-company investments and made the downward valuations known. ” “This will be great for VCs and bad for entrepreneurs.” Why Inside Rounds are Difficult?

Keep Term Sheets Simple for Quicker Cash to Spend

Startup Professionals Musings

Entrepreneurs sometimes assume an initial agreement with an Angel is a commitment, so they start spending before any money is received. It’s true that Angel investors typically do not present entrepreneurs with overly complicated deal structures, especially when compared to venture capitalists. However, there is no set pattern of terms an entrepreneur might be able to anticipate from either. Venture capitalists and later round investors like the preferred convertible shares.

A Primer on Angel Investment ‘Simple Term Sheets’

Startup Professionals Musings

Entrepreneurs sometimes assume an initial agreement with an angel is a commitment, so they start spending before any money is received. It’s true that angel investors typically do not present entrepreneurs with overly complicated deal structures, especially when compared to venture capitalists. However, there is no set pattern of terms an entrepreneur might be able to anticipate from an angel, either. It prevents the entrepreneur from selling early, at a loss to the investor.

Three Startup Financing Myths You Should Avoid

YoungUpstarts

The real issue here is that if an entrepreneur comes in to a pitch and goes on and on about how they’re going to build a billion dollar company in just a few years, most investors eyes tend to glaze over. The real key is to have an entrepreneur that is obsessed with a small market.

Bad Notes on Venture Capital

Both Sides of the Table

We raised a seed round. You’ll find out the minimum when the next round is raised. At an accelerator … Me: Raising convertible notes as a seed round is one of the biggest disservices our industry has done to entrepreneurs since 2001-2003 when there were “full ratchets” and “multiple liquidation preferences” – the most hostile terms anybody found in term sheets 10 years ago. How will you price the next round? This week.

How to Talk About Valuation When a VC Asks

Both Sides of the Table

One of the hardest things about the fund-raising process for entrepreneurs is that you’re trying to raise money from people who have “asymmetric information.” As an entrepreneur it can feel as intimidating as going to buy a car where the dealer knows the price of every make & model of a car and you’re guessing at how much to pay. What was the post money on your last round (and how much capital have you raised)? VCs hate “down rounds” and many don’t even like “flat rounds.”

Take advantage of the good times to build stakeholder loyalty.

Berkonomics

For investors, a subsequent down round at a lower valuation than the last, or an exit opportunity at a loss are all opportunities for the affected stakeholder to show a side that can sometimes shock an entrepreneur or CEO. Loyalty is a hard-earned commodity. There are several times when stakeholder loyalty is tested to the limit.

Lean Startups aren't Cheap Startups

Steve Blank

In times when venture capital is hard to get, investors extract high costs for failure (down-rounds, cram downs , new management teams, shut down the company.) Therefore when money is hard to come by, entrepreneurs (and their investors) look for ways to reduce cash burn rate and increase the chance of finding product/market fit before waste you bunch of money.

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Seed investment negotiation mistakes

NZ Entrepreneur

The following highlights some ways founders sometimes trip up in negotiating an early investment round, resulting in a deal they are unhappy with, a tainted relationship with the investor, or losing the deal altogether. For some founders, negotiating a seed investment can be difficult.

Reduce five risks: Increase your valuation

Berkonomics

In the creation of a young company, there are five principal risks to be addressed by the entrepreneur. So, it is important for the entrepreneur to identify, address and mitigate each of these in order to increase valuation and decrease the risk of ultimate loss of the business.

Sensitivity Analysis key in startup financial projections

NZ Entrepreneur

If a startup expects $1M in sales revenue but only gets $100k and they haven’t got a backup plan, they may face a down round or in the worst case liquidity concerns. The post Sensitivity Analysis key in startup financial projections appeared first on NZ Entrepreneur Magazine.

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Keep Term Sheets Simple for Quicker Cash to Spend

Gust

Entrepreneurs sometimes assume an initial agreement with an angel is a commitment, so they start spending before any money is received. It’s true that angel investors typically do not present entrepreneurs with overly complicated deal structures, especially when compared to venture capitalists. However, there is no set pattern of terms an entrepreneur might be able to anticipate from either. Venture capitalists and later round investors like the preferred convertible shares.

Changes in the Venture Capital Funding Environment

Both Sides of the Table

In other words, it isn’t that VCs suddenly got smart, it’s that the costs of starting a company went down dramatically. I Leaderless Rounds. With a massive increase in companies created and a huge number of sources one trend that we witnessed from 2012–2015 was the rise of the undisciplined round. Non VC Growth Rounds. The market eventually slowed down. Some examples There was an A-prime round of a high-profile deal coming together.

Current Startup Market Emotional Biases

Feld Thoughts

Fred Wilson’s daily post referred to the article in Don’t Kick The Can Down The Road. Also, they have a strong belief that any sign of weakness (such as a down round) will have a catastrophic impact on their culture, hiring process, and ability to retain employees. Their own ego is also a factor – will a down round signal weakness? Entrepreneurs and CEOs should make the hard call today and take the poison and move on.

Bad Notes on VC

Gust

We raised a seed round. You’ll find out the minimum when the next round is raised. Me: Raising convertible notes as a seed round is one of the biggest disservices our industry has done to entrepreneurs since 2001-2003 when there were “full ratchets” and “multiple liquidation preferences” – the most hostile terms anybody found in term sheets 10 years ago. Convertible notes have both features in them but for some reason entrepreneurs don’t understand it.

What Do Industry Insiders Think Will Happen in VC in 2016?

Both Sides of the Table

So why the slow down all of a sudden? 61% of VCs said valuations were “marginally down” in Q4 of 2015 but 91% expect price decreases in the next two quarters. If median valuations are down massively, later-stage investors are staring at their trading terminals and fund-raisings are taking longer – of course companies must cut burn rates. Most flat rounds. More down rounds. More structured rounds.

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Venture Capital Q&A Session

Both Sides of the Table

We received so much positive feedback from our This Week in Venture Capital show walking through valuation calculations & term sheets that we decided to do a Q&A show this week to address topics that entrepreneurs want to learn about. on the entrepreneur side of the table) when I raised at too high of a price. The A round was done in February 2000 (end of the bull market) and my B round was done in April 2001 (bear market).

Why Raising Too Much Money Can Harm Your Startup

Both Sides of the Table

I understand this instinct for more capital and I have two very different personal experiences: In my first company we raised an A-round of $16.5 There is a general guideline of how much investors want to own in order to invest in your company and the norm is 15–30% with the most common range 20–25% per early stage round. And if you raise the “5 on 20” and don’t grow into your next-round valuation you’re stuck because venture investors HATE doing down rounds.

A Recently Exited Founder on Surviving the Contradictory Role of Startup CEO

View from Seed

I called the recruiter running the search and told him I was going to step down and hire a CEO. Other CEOs are the only people you can sit down and talk with about the hardest parts of your job. Sometimes the only path forward is to fill a gap with a down round of funding, a B-player, or some other non-ideal option. Special thanks to Rob May for sharing his advice to other startup CEOs and entrepreneurs.

Why Startups Should Raise Money at the Top End of Normal

Both Sides of the Table

I have conversations with entrepreneurs and other VCs on a daily basis about fund raising, the prices of deals, how much companies should raise, etc. If you invested in the first angel round of a startup company it is usually very hard to sell your stock – usually for many years if ever at all. So rounds tend to be “range bound&# where the top end of the valuation spectrum often being done in boom markets (i.e. I raised my A round at a $31.5

Can you overcome five risks and create wealth?

Berkonomics

Especially if you are in the early stage of growing a business, these five risks can and often do derail entrepreneurs before realizing the riches of a great exit. Of course, we are speaking of increased valuation of your company when we speak of “wealth.” So, let’s examine them and mitigate them. Make you wealthy someday. The carrot and the stick. In the creation of your enterprise, there are five principal risks you’ll need to navigate. around.

Premature scaling at Series B

The Equity Kicker

In my experience this is one of the hardest points for many entrepreneurs to grasp. It all comes down to probabilities in the end – anyone can get lucky – the trick is getting a handle on how lucky your plan requires you to be… The article describes how it goes wrong in two ways, firstly: Your company is growing and scaling well, often on little invested capital.

Does your business need money? Read this!

Berkonomics

However, most often, these funds are solicited by a well-meaning entrepreneur from investors who are not qualified as accredited investors under the law (currently requiring a proved income of $200,000 a year or $1 million in net worth for an individual investor). I’ve arrived at a significant number of companies that were looking for additional growth capital after a “friends and family” round, and had to “clean up” the cap table more than a few times over the years.

What is the Right Burn Rate at a Startup Company?

Both Sides of the Table

In a world where the economy only heads in one direction (read: 2009-2014) most investors & entrepreneurs forget to pay attention to gross burn. ” Stay lean and only raise a big round if you DO find product / market fit and which point you want to loosen the belt quickly and raise the capital to do so. Of course a lot of this also comes down to investor trust.

What I *Would Have* Said at TechCrunch Disrupt

Both Sides of the Table

These days that’s not the case and it’s a great outcome for entrepreneurs and for innovation. A: Only because it’s a nicer branding for entrepreneurs. I totally agree and have been arguing this to entrepreneurs for years. I used an analogy I heard from Michael Dougherty (founder of Jelli) recounting what First Round Capital told him, “sometimes you’re on the local train and sometimes you’re on the express train.

Twitter Link Roundup #178 – Small Business, Startups, Innovation, Social Media, Design, Marketing and More

crowdSPRING Blog

The Start-up Hall of Shame (America’s 10 Worst States for Entrepreneurs) – [link]. The Damaging Psychology of Down Rounds | by Mark Suster – [link]. Twitter link roundups ads advertising branding copywriting crowdsourcing design entrepreneur entrepreneurship facebook industrial design leadership marketing package design pr product design public relations small biz small business Social media startups twitter writing

On the Road to Recap:

abovethecrowd.com

John was the first to uncover that just because a company can raise money from a handful of investors at a very high price, it does not guarantee (i) everything is going well at the company, or (ii) those shares are permanently worth the last round valuation. With the public markets down, these groups began writing down Unicorn valuations. The last round is not the permanent price, and being private does not mean you get a free pass on scrutiny.

Address the five risks to increase your valuation.

Berkonomics

In the creation of a new enterprise, there are five principal risks to be addressed by the entrepreneur. So it is important for the entrepreneur to identify, address and mitigate each of these in order to increase valuation and decrease the risk of ultimate loss of the business. Professional investors will probe these five risk areas and make the decision to invest based upon comfort with each.

Startup Fairy Tales and Other Tall Tales That Venture Capitalists Tell

Growthink Blog

An entrepreneur starts a company in classic " bootstrap " fashion - with a combination of sweat equity and their own financial resources. Through connections, or through a chance meeting at a networking or social event, an angel investor hears the entrepreneur's story, likes them and their technology, and on the spot, writes a check to provide the company with its first outside financing.

On Bubbles … And Why We’ll Be Just Fine

Both Sides of the Table

This was an audience of mostly first-time entrepreneurs. It is great for entrepreneurs and great for VCs. So here is what I have been telling entrepreneurs privately for the past 6 months. And so on down then line. What a bubble means for each entrepreneur. New investors hate down rounds. So I’m not advocating panic or a need to rush your funding round. Why the bad side of bubbles affects entrepreneurs & investors alike.

Create stakeholder loyalty when times are good.

Berkonomics

For investors, a subsequent down round at a lower valuation than the last, or an exit opportunity at a loss are all opportunities for the affected stakeholder to show a side that can sometimes shock an entrepreneur or CEO. There are several times when stakeholder loyalty is tested to the limit. For employees, a late or missed payroll is the ultimate test of corporate loyalty, divorced even from an employee’s ability to make do without a paycheck.

How do VCs measure their success (and why you should care)?

Hippoland

When I was an entrepreneur, it never crossed my mind how VCs measure their success. So, as an entrepreneur, in many cases, you are pitching people who may not even be good investors. Primarily these things: Companies dissolvingCompanies exitingCompanies raising equity rounds All of these events are concrete events that attach a numerical value to a company. If a company raises a good round, it gets marked up to the new value. Equity rounds of $10m pre.

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Venture Outlook 2016

Both Sides of the Table

Or the influx of massive new amounts of entrepreneurs and wantrepreneurs seeking fortune and fame? On the chart below, 78% of the rounds of 80 $1bn+ companies were led by non VCs. Here is a chart to show you the median valuation of late stage private tech companies compared to traditional growth rounds of capital led by VCs and also vs. the public markets. This must be a boon for entrepreneurs of fast-growing tech firms – right? 25% “down rounds?

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Are Investors Being Unreasonable? - Startups and angels: Along the.

Tim Keane

Who the entrepreneur takes money from (see this post ) is always more important than the terms. "  The problem has been that too-high valuations and too generous terms have spawned painful down rounds that squash the entrepreneur and his early investors.    New money, usually VC money, comes in and crams down those early investors and takes substantial shares from the entrepreneur.    If the entrepreneur can bootstrap.